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Data-centric MVNOs in the US – will they byte?

Data-centric MVNOs in the US – will they byte?

The Delta Perspective

December 2013

The last two years have seen new MVNOs disrupt the traditionally postpaid US market. Betting on new data-centric business models, this new breed of MVNOs targets value-conscious subscribers with prepaid voice and data services at a fraction of the price of leading players (as low as ten times less). They combine great value with innovative first-to-market propositions:

FreedomPop is likely the most disruptive of the group. Backed by Skype co-founder Niklas Zennstrom, it follows Skype’s freemium concept – for many “a crazy business model”. The company literally offers data for free: just by signing up you get 1GB on LTE per month for free. And you can get additional data by signing up for partner promotions, referring new users or requesting data from your FreedomPop friends (using the online portal user dashboard).

FreedomPop hopes to make money through partner revenues and premium add-ons such as being alerted when you are about to hit your data limit, rolling over unused megabytes or enjoying speedier LTE.

How can they be this aggressive?

Despite lower ARPUs, smaller bases and lower margins (12% EBITDA in the case of Straight Talk), MVNOs can make money if they manage to gain a certain size and optimize their business model through:

Flexible cost structure: Wholesale voice can cost up to four times the price of a VoIP minute, so replacing traditional voice with VoIP is key to lowering wholesale costs. Or pushing subscribers onto Wi-Fi as much as possible, such as Republic Wireless which allows 3G usage only if Wi-Fi is not available.

Bare bones opex: No network, limited marketing spend (word of mouth, MGMs, social networks), no subsidies, online sales (100% in many cases), great self-care and very lean organization structures.

Limited or no capex: Capex limited to billing capabilities and customer relationship management, which, depending on the MVNO model, could also be outsourced to the network operator.

Should US telcos feel threatened?

US MVNOs have historically struggled to survive – see ESPN Mobile and Disney Mobile. Despite making customers more cost-conscious, the new data-centric MVNOs have not proven their case yet either: FreedomPop has only ~200k subscribers and Ting ~100k. However, these new entrants and continued growth in US prepaid subscriptions, which topped 100 million for the first time this year, have forced players such as Verizon to increase data allowance in its prepaid plans and pushed AT&T to launch its own prepaid subsidiary, Aio Wireless, offering “MVNO-like” value-for-money unlimited data plans.

The jury may still be out on how big of a headache these new MVNOs will be to traditional US players – but the prepaid data market will never be the same.